Westlake Chemical Partners LP — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited consolidated results include OpCo, which the Partnership controls and consolidates; Westlake owns the remaining 77.2% of OpCo. Figures below are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Business context
The Partnership’s sole revenue-generating asset is its 22.8% limited partner interest in OpCo, which operates three ethylene facilities and a pipeline. Most ethylene sales are made to Westlake under a long-term, cost-plus agreement with a minimum purchase commitment. Westlake accounted for 84.3% of Q3 sales and 80.1% of nine-month sales.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $294.0 | $232.0 | $884.4 | $721.0 |
| Gross profit | $75.9 | $100.4 | $294.7 | $294.0 |
| Gross margin | 25.8% | 43.3% | 33.3% | 40.8% |
| Operating income | $68.1 | $94.1 | $269.9 | $275.4 |
| Consolidated net income | $66.1 | $91.8 | $263.0 | $266.0 |
| Net income attributable to Partnership | $12.8 | $18.5 | $53.0 | $51.1 |
| Net income per common unit | $0.36 | $0.53 | $1.51 | $1.45 |
| MLP distributable cash flow | $13.0 | $21.2 | $54.8 | $56.4 |
| EBITDA | $94.7 | $120.1 | $352.8 | $353.9 |
Cash flow and liquidity: Operating cash flow for the first nine months was $386.6 million, up from $340.9 million, primarily reflecting a favorable working-capital swing, including collection of a prior-year Westlake deficiency fee. Investing cash outflow was $111.4 million, including $38.5 million of capital expenditures and net investment under the Investment Management Agreement. Financing cash outflow was $273.7 million, including $49.8 million of distributions to public and Westlake-held Partnership unitholders and $223.9 million distributed to Westlake’s retained OpCo interest. Period-end cash was $18.6 million; a further $196.3 million was invested with Westlake and stated to be available daily.
Debt: Debt payable to Westlake totaled $399.7 million, unchanged from year-end 2020, with a 2.1% weighted-average rate and variable LIBOR-based pricing. The facilities mature in 2023. The Partnership reported compliance with debt covenants. A 100-basis-point rate increase would raise annual interest expense by approximately $4.0 million, based on the period-end balance.
Distributions: The quarterly distribution was $0.4714 per unit, unchanged year over year. The general partner declared the Q3 distribution after quarter-end, payable November 29, 2021. The filing states that distributions are not legally or contractually required at any particular rate.
Material changes and management commentary
- Q3 sales rose 26.7%, but gross profit fell $24.5 million and gross margin contracted 17.5 percentage points. Higher sales prices and greater production and sales to Westlake were outweighed by higher ethane and natural gas costs, lower third-party sales volumes, and the prior-year period’s $41.3 million buyer deficiency fee.
- For the first nine months, sales rose 22.7%, while operating income declined $5.5 million. Higher commodity costs and lower Westlake sales volumes weighed on results; higher prices, third-party volumes, and $21.5 million of 2021 buyer deficiency and Shortfall fees provided offsets. Lower interest expense helped Partnership-attributable income increase year over year.
- MLP distributable cash flow declined in both comparisons, which management attributed partly to lower OpCo earnings and higher turnaround reserves and maintenance expense.
- OpCo’s Petro 2 turnaround began in September and was expected to conclude in December, later than originally planned, following a September 27 flash fire at the quench tower. Several contractors were injured; the tower had no significant damage and there was no offsite impact. Five related lawsuits were pending.
Outlook, risks and contingencies
Management said it did not expect significant business disruption from COVID-19, but noted that the ultimate effects remained uncertain. It believed available liquidity would meet short- and long-term requirements and fund quarterly distributions; Westlake may provide financing but is not obligated to do so. No specific earnings or production guidance was provided.
Key exposures include commodity and energy price volatility, operating interruptions and turnaround duration, dependence on Westlake as customer and financing counterparty, variable-rate debt and LIBOR transition, and environmental regulation. The Partnership disclosed an EPA flare-enforcement matter that could require a monetary sanction exceeding $300,000; Westlake was expected to indemnify the Partnership. The Partnership also described environmental liabilities and other legal proceedings, and said it did not expect the proceedings to materially adversely affect its financial condition, results or cash flows. Westlake indemnifies certain pre-IPO liabilities.
Most important facts for investors to verify
- Whether the Petro 2 turnaround concluded as expected and what effects the flash fire, investigation and pending lawsuits may have on operations, costs or liabilities.
- Actual collection and timing of the $21.5 million in 2021 buyer deficiency and Shortfall fees, scheduled for receipt after year-end.
- Whether margins and distributable cash flow recover as feedstock and energy costs, production levels and turnaround spending change.
- Liquidity and counterparty exposure associated with the $196.3 million invested with Westlake, alongside $399.7 million of debt owed to Westlake.
- Progress on replacing LIBOR for variable-rate borrowings and the 2023 maturities of both revolving facilities.
- Developments in the EPA flare matter, including the potential sanction and Westlake’s expected indemnification.